Stock market could drop by a third, Martin Feldstein warns

A prominent Harvard economist is warning that the U.S. stock market, which on Monday extended Friday's big drop -- is set for a drop of as much as a third of its current value, an outlook that would entail the Dow Jones Industrial Average tumbling to approximately 16,000 from its current lofty level.

Speaking to FOX Business’ Stuart Varney on “Varney & Co." he said that based on historical norms, the equity markets could surrender as much as a third of their current value.

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“We’ve had 10 years, almost 10 years, of near zero [percent] interest rates and so everybody reaching for yield has bid up stock prices, bid up bond prices, bid up real estate prices to levels which are way out of line with the past. You know, we have to come down 30% or 40% to get back to just the historic average.”

Although Feldstein couldn’t predict when, he warned the market environment is vulnerable.

“What I know is that we’ve got a very fragile situation and interest rates are rising, and that combination is going to spell, at some point, a downturn in the equity markets.”